Apple Faces U.S. Suit Over E-Book Price Fixing Allegations

Apple, Macmillan and Penguin face allegations by the U.S. Department of Justice for colluding to keep the prices of ebooks high after they refused to engage in settlement talks with the latter. [1] Three other publishing houses, Simon & Schuster, Hachette Book Group and HarperCollins, that were also in the DoJ’s cross hairs, are meanwhile ready to settle the dispute outside the court. The DOJ claims that the publishers teamed up with Apple to take on Amazon, which was starting to exert a huge control on the publishing industry with its highly discounted ebook editions.

Traditionally, book publishers sold their content to retailers for about half the cover price of their physical books. Retailers such as Amazon could then price their books as they wished. With physical books, Amazon rarely discounted the books heavily as the industry was already large with plenty of competition and physical books were being sold widely. Moreover, reading an ebook on a laptop or a desktop was difficult for readers and so this market didn’t take off at first.

However, with the advent of ebook readers, users began to take to ebooks in earnest. Amazon came up with its own e-reader, the Kindle, to help drive sales. Further, seeing the huge growth opportunity that the ebook market presented, it started discounting the ebooks heavily in order to rapidly gain a bigger share of the nascent online market.

…much to the chagrin of publishers

Now this had the publishers worried. Not only did the highly discounted prices cannibalize the sales of their higher-priced physical editions but also undermined the value of their content to such an extent that the publishers were concerned about its long-term impact on their business. This brought back memories of the music industry’s death at the hands of the Apple iTunes. Then, the record companies had not realized the impact of the Internet as a disruptive force and before they knew it, Apple’s iTunes had become a phenomenon selling music for 99 cents.

Apple stages a coup

However now, the shocking precedent made publishers wary and wondering what they could do to avoid a repeat of this scenario. At the same time, Apple was readying plans to launch the iPad and Steve Jobs had his eyes trained on the growing ebook market to supplement his iTunes and App stores and drive iPad sales.

An unlikely collaboration ensued. Taking advantage of the Amazon-publishers rift, Apple came up with an agency pricing model that let publishers set the prices of their ebooks while Apple kept a 30% cut for every ebook sold on their iBooks platform in return.

One might wonder why the publishers chose to collaborate with another company that could also pose the same threat to their higher-margin physical books business as Amazon in the longer term. Isn’t the whole online market a threat to their core traditional businesses?

We believe that publishers understood, unlike their music counterparts, that the online market is here to stay. Moreover, it is only going to grow, going forward. If publishers did not embrace the inevitable, they could see their businesses suffer even worse. What Apple was giving them was a better control over the pricing of their content and a chance to play a bigger role in this online boom — a chance that the record companies never got.